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Structural reforms can make the difference as countries rebound from crisis, OECD says

24/02/12 - Structural reforms can make the difference as countries seek to rebound from the crisis, boost growth and create jobs, according to the OECD’s latest Going for Growth report.

"The crisis has acted as a catalyst for reforms. While they are sometimes unpopular, painful or both, they are necessary to make longer term growth stronger, more sustainable and more equitable," said OECD Secretary-General Angel Gurría (read the full speech). "We know that these efforts will pay dividends in the future, which is why governments must keep up the reform momentum," Mr Gurría said.

Mr. Gurría presented the report in Mexico City with Mexico’s finance minister Jose-Antonio Meade, ahead of the 25-26 February meeting of G20 finance ministers. He said the OECD’s country-specific structural reform recommendations are applicable to all G20 countries as they steer their economies out of the crisis.

Since Going for Growth was launched in 2005, the annual report has identified key reform priorities to boost economic activity and raise living standards in each OECD country. Since 2011, the report also addresses reform potential in Brazil, China, India, Indonesia, Russia and South Africa, and has been a key part of the OECD’s wider contribution to the G20 Framework for Strong, Sustainable and Balanced Growth.

How the crisis is spurring reforms

Change in overall responsiveness to OECD recommendations from 2008 to 2011

The OECD report assesses and compares progress that countries have made on structural reforms since the start of the crisis, covering the 2007-11 period. It shows that the pace of reform has accelerated where it is needed most – in the European countries hardest hit by the sovereign debt crisis, including Greece, Ireland, Portugal and most recently, Spain and Italy.

The new European reform agenda has been spurred by the need to consolidate public finances and better manage pressures from the sovereign debt crisis. This has led governments to announce and begin implementing politically difficult yet ambitious reforms in areas including pension schemes, labour market policies and product market liberalisation. “Structural reforms now underway in Europe will eventually help reduce the economic imbalances that contributed to the debt crisis,” Mr Gurría said.

Going for Growth encourages governments to push forward with policies to boost job creation, against a background of continuing fiscal consolidation. These include sheltering active labour market policies from budgetary cuts, easing regulatory barriers to firm entry in markets with strong, short-term job-creation potential like retail trade or professional services, and reforming tax systems in ways that are less harmful to employment and growth. Governments should eliminate tax expenditures that do not promote growth, and shift the tax burden towards consumption, immovable property and environmental taxes.

The long-term gains from reforms are sizeable: recent OECD work shows that a broad and ambitious reform agenda could lift GDP growth by as much as one percent annually on average across the OECD area over the next decade, while delivering sizeable gains for emerging-market economies as well. Drawing on three decades of reform experiences, the report finds that concerns about adverse short-term effects of such reforms are overblown. Indeed a number of structural reforms appear to boost growth fairly quickly, while usually very few if any have short-term costs.

“The design and timing of reforms matters. A broad package of reforms delivers more quickly and strongly than a piecemeal strategy,” Mr Gurría said.